Chapter 5 - Differentiation Advantage PDF

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Dr. Corey Fox

Wiley PLUS Concept Checks/Quiz answers...

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Chapter 5: Differentiation Advantage

MGT 4335 – Strategic Management

What is Product Differentiation?

I.

Product Differentiation A strategy whereby companies attempt to gain competitive advantage by offering value that is not available in other products or services or that other products don't do as well.

Concept Check 5.1: 1. A strategy whereby companies attempt to gain competitive advantage by offering value that is not available in other products or services or that other products don’t do as well is known as ________. A. B. C. D.

Prestige Branding Brand Imaging Product Differentiation Sustained Competitive Advantage

2. Product differentiation is always a matter of customer perception. A. True B. False 3. Which of the following statements regarding product differentiation is incorrect? A. A lower price is typically necessary because attempts to differentiate products usually require companies to invest resources that decrease the cost of their offering. B. The actual products of two different companies may be similar in terms of technical features, but if one product is perceived as being different in a way that is valued by customers, then product differentiation exists. C. When customers go to purchase a product to get a job done, they tend to consider two factors: the way a product is differentiated from other products to perform the job they want done and the price of the product. D. When the perceived value of a product increases in the mind of the customer, it also increases the customer’s willingness to pay a higher price.

II.

Sources of Product Differentiation Different Product/Service Features: Offering different product features is the most frequently used source of differentiation. It is useful to think about offering different product features in three ways: 1. The product does a “better job” of meeting a customer need on existing product features. Some companies differentiate their products by focusing on one particular feature and doing a better functional job than other products of providing value on that particular feature. For example, Dyson vacuums have gained market share by claiming the Cyclone™ technology in their vacuums provides better “sucking” capability. Dyson's tagline: “The strongest suction at the cleaner head.” It doesn't necessarily claim that its vacuums are more reliable or lighter and easier to use—other features that customers might care about. The key differentiator is suction capability, which is supposed to do a better job of getting carpets clean.

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2. The product does “more jobs” for the customer than other products. In some cases, a product might not do a better functional job but simply does more jobs, or meets more needs, for customers than competitor offerings. For example, Facebook did a job that the other social networking sites did not do when it gave users the ability to alert their friends about their “relationship status,” a particularly important piece of information for teenagers and college students. 3. The product does a “unique job” that nothing else does. Some products do a completely unique job that other products simply do not do. Rather than simply doing existing jobs better or doing more of jobs than other products, they offer a completely new feature to the market. For example, Propecia was the first pharmaceutical pill that was clinically proven to grow hair. No other pill could do that unique job. Disney theme parks are the only places you can go to see Mickey Mouse or ride the Pirates of the Caribbean to see Captain Jack Sparrow.

Mass Customization When a company mass-produces the various modules of the product and then allows the customer to select which modules will be combined together.

Quality or Reliability: Some products are differentiated because of the quality or reliability of the product. The product doesn't necessarily do a better job as far as performance on existing features. It doesn't do more jobs than other products, and it doesn't do a unique job. It simply lasts longer.

Convenience: Another differentiator used by companies is making their products more convenient to find and purchase.17 The product itself might actually be identical to other products on the market, but the seller has figured out a way to make it easier for customers to buy.

Network Effects Growth in demand for a firm's product that results from a growth in the number of existing customers using that product.

Brand Image: Companies often turn to this source of advantage when they have difficulty differentiating their products based on features, reliability, or convenience.

Brand Image When products are differentiated through marketing, via advertisements, promotions, and other marketing activities.

Prestige Brands When products are differentiated by being associate with positive qualities in the minds of customers.

Concept Check 5.2: 1. _________ is when a company produces in bulk the various modules of a product and then allows the customer to select which modules will be combined together.

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A. Mapping the Consumption Chain B. Mass Customization C. Product Differentiation D. Mass Segmentation 2. Which term describes when some products or services are more convenient to use because there is a large group of other users? A. B. C. D.

Mapping the Consumption Chains Prestige Brands Network Effects Mass Customization

3. _________ is defined as products that are differentiated through marketing, via advertisements, promotions, and other marketing activities. A. B. C. D.

Brand Image Prestige Brands Product Prestige Product Differentiation

4. Which of the following involves products being differentiated by being associated with positive qualities in the minds of customers? A. B. C. D.

III.

Prestige Brands Brand Imaging Network Effects Customer Segmentation

How to Find Sources of Product Differentiation Customer Segmentation: Companies are more successful when they can offer the exact value that each customer is looking for. However, the cost of designing a specific product for each customer is usually prohibitively high. The next best solution is to group customers based on similar needs and then create products that meet the needs of a particular group.

Customer Segmentation Grouping customers based on similar needs. Customer Segments Groups of people who share similar needs and thus are likely to desire the same features in a product. The marketing function within companies is typically charged with the challenge of market segmentation. Marketers typically segment markets in one of three ways: 1. Based on various attributes or the price of products. One way to segment customers is based on product attributes. For example, customers looking to buy motorcycles may place different value on different attributes, such as power (speed), reliability, ease of handling, gas consumption, or customizability. By assessing the relative importance that customers put on different attributes, and grouping customers based on what they want in those attributes, it may be possible to design products to meet the needs of that customer segment.

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2. Based on attributes of the individuals or companies who are customers, including demographics or psychographics. Another way to segment customers is based on the demographics of customers. Popular ways to segment the consumer market include by age, socioeconomic status (e.g., income), education, profession, and ethnic group. 3. Based attributes of the customer's circumstance, or what is called the job-to-be-done view, an alternative way of segmenting customers that has emerged recently. Clayton Christensen suggests that customers “hire” products to do “jobs” for them. He further argues that, “What this means is that the job, not the customer or the product, should be the fundamental unit of market segmentation analysis.” When people have a “job” to do, they set out to hire something to help them do the job as effectively, conveniently, and inexpensively as possible. Observing someone in a particular circumstance can lead to insights about a job to be done—and a better way to do the job.

Mapping the Consumption Chain: Mapping the Consumption Chain Identifying all the steps through which customers pass, from the time they first become aware of your product to the time when they finally have to dispose of it or discontinue using it. 1. How Do Consumers Become Aware of Their Need for a Product or Service? The first step in the consumption chain occurs when customers become aware that they need a product or service. A company may be able to differentiate its product if it can find a unique way to make consumers aware of a need. 2. How Do Consumers Find Your Offering? After potential customers are aware that they have a need for a product, they then must find it. Companies can differentiate their offering if they can make the search process easier for customers by making it less complicated, more convenient, or less expensive. 3. How Do Consumers Make Their Final Selections? After a consumer has narrowed down the possibilities, they must make a choice. This is the time when product attributes typically dominate, and it is critical to ensure that consumers are aware of features that differentiate a product. Some companies assist in product selection by providing customers with side-by-side comparisons of their products with those of competitors. 4. How Do Customers Order and Purchase Your Product or Service? Another way to differentiate a product is to make the process of ordering and purchasing more convenient. Amazon.com has made the process of purchasing a product online easier by storing all of your relevant personal and credit information and allowing you to use their “oneclick” purchase option. Similarly, Starbucks has created a “Starbucks Card” that is essentially a credit or debit card that allows you to quickly swipe your way to a coffee. 5. How Is Your Product or Service Delivered and Installed? Customers sometimes need to have products that they purchase delivered, installed, or assembled. Transporting and assembling products are stumbling blocks for customers, so these services can be a source of differentiation. RC Willey, a successful retailer of furniture,

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appliances, and televisions, guarantees delivery within 48 hours for those who want it. Quick delivery is especially important to customers whose refrigerator has quit working or who need a new bed. 6. How Is Your Product Stored? When it is expensive, inconvenient, or even dangerous for customers to have a product simply sitting around, a company has the potential to differentiate the product by providing better or easier storage options. Air Products and Chemicals, a maker of industrial gases, became the leader in its market segments by addressing the problem of storage. Air Products realized that most of its customers—chemical companies—would rather avoid the burden of having to store vast quantities of high-pressure gases. So, it built small industrialgas plants next to its customers' sites. This created an important differentiator by making gas storage more convenient. Even better, after an Air Products plant was built next to a customer, competitors had little opportunity to move in. 7. What Do Customers Need Help with When They Use Your Product? Sometimes a customer will need assistance when using a product or service. A company can differentiate on that dimension if it understands what kind of help customers need and can provide that assistance more effectively than other companies. For example, each year during Thanksgiving in the United States, millions of home chefs cook a turkey. Many of these people are making a turkey for the first time and have questions about the process. Butterball's 24hour Turkey Talk-Line fields questions from thousands of these customers every Thanksgiving. 8. What If Customers Aren't Satisfied and Need a Return or Exchange? While many companies focus on the customer through the sale and installation of a product, others realize that long-term loyalty requires attention to customers' needs throughout their experience with a product. Handling problems well when the product doesn't work out for a customer can be as important as meeting the need that motivated the initial purchase. 9. How Is Your Product Repaired, Serviced, or Disposed Of? As many users of technologically-sophisticated products will attest, repair experiences—both good and bad—can influence a lifetime of subsequent purchases. This is particularly true if you are highly inconvenienced because the product fails to work properly, as is the case of an elevator (nobody wants to get stuck in an elevator).

Concept Check 5.3: 1. Grouping customers based on similar needs is known as _________. A. B. C. D.

Mapping the Consumption Chain Customer Segmentation Mass Customization Customer Value

2. The marketing function within companies is typically charged with the challenge of market segmentation. One way to segment customers is based on product attributes, which involves ________. A. Product Customizability B. The Job-To-Be-Done View

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C. Mapping the Consumption Chain D. Psychographics 3. ________ consists of identifying all the steps through which customers pass, from the time they first become aware of your product to the time when they finally have to dispose of it or discontinue using it. A. B. C. D.

Customer Segmentation Network Effects Mapping the Consumption Chain Product Differentiation

4. The first step in the consumption chain occurs when customers begin searching for a product. A. True B. False

IV.

Building the Resources and Capabilities to Differentiate Customer segmentation and mapping the consumption chain are useful tools for identifying what unique value to offer a customer. However, it is just as important for a company to figure out how to deliver that unique value. For example, how does a company consistently offer different features in its products? How does a company deliver high quality and reliability? How does a company build a brand image? Building the capacity to deliver unique value requires acquiring and allocating resources. For example, Howard Schultz, founder of Starbucks, got the idea for Starbucks Coffee Bars during a visit to Italy. There, he observed “espresso bars” that offered customers their choice among multiple blends of coffees—far more than the typical coffee shop in the United States—and were conveniently located at several places throughout major cities.

How Starbucks Built the Resources to Differentiate: Starbucks's ability to deliver on a differentiation strategy of offering high-quality coffee at convenient locations required that the company build its resources and capabilities. One capability that proved essential in order for Starbucks to differentiate itself with high-quality coffee and multiple blends was the ability to roast and blend coffee beans. Most coffee shops in the United States did not roast their own coffee beans and therefore couldn't match the quality of coffee that Starbucks offered. Roasting its own beans also allowed Starbucks to create signature blends, experimenting with different beans and different ways of roasting to offer a variety of flavors. Then, it built capabilities to highly train baristas to peddle its gourmet blends in a way that added to the feeling that Starbucks was a trendy hangout. Starbucks also learned—through analysis and trial and error—to identify the optimal locations within a city in order to make each shop as conveniently accessible to as many customers as possible. To prevent imitation of its coffee shops, Starbucks built stores as quickly as possible so that would-be imitators would find that the best locations for similar coffee shops within a city already were taken. There are numerous types of resources and capabilities that a firm can build and deploy to deliver unique value better than competitors. For Starbucks, two of the key capabilities have been the ability to effectively roast and blend coffee beans and the ability to identify optimal store locations and quickly fill those locations with Starbucks shops and highly trained baristas.

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Schultz also realized that many people in the United States would also want to purchase highquality coffee at convenient locations where they could sit and enjoy their drinks with friends in a comfortable atmosphere. Schultz had identified a unique value. Now, he needed to build the resources and capabilities to deliver that value.

Concept Check 5.4: 1. It is just as important for a company to figure out how to deliver unique value to customers, as it is to identify what unique value to offer to customers. A. True B. False 2. According to consultant and researcher Fred Reichheld, the answer to the question, “What metric can I use to assess how well my differentiation strategy is working?” lies in whether you can satisfy customers to such a degree that they are willing to recommend your company (or product) to a friend or colleague. A. True B. False

Chapter 5 Practice Quiz: 1. When Facebook was launched, it was exclusive to only ________. A. B. C. D.

People 18 and Above People 13 and Above Students at Harvard Students

2. Which of the following was not a “differentiating” factor for Facebook over MySpace? A. B. C. D. 3.

Facebook allowed for friend requests. Facebook offered a clean appearance and layout. Facebook did not have advertisements. Facebook was more customizable.

It is important to remember that product differentiation is always a matter of _________. A. B. C. D.

Offering different product features Customer perception Understanding the job to be done Performing different activities than competitors

4. According to Reichheld, a customer scoring an 8 would be considered __________. A. B. C. D.

Neutral Worthless A Promoter A Detractor

5. List three of the four major categories of differentiation that the text outlines. 1. Product Features

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2. Quality/Reliability 3. Convenience 4. Brand 6. Offering different product features can be done in all of these except: A. B. C. D.

A Better Job More Jobs A Unique Job Stable Jobs

7. What company was used as an example of doing a “better job” with the extraordinary customer service they provide? A. B. C. D.

Nordstrom Ruth’s Chris Facebook Southwest

8. Build-a-Bear uses the (Mass Customization) approach to differentiate their products. 9. The two major ways companies attempt to find sources of product differentiation are (Customer Segmentation) and the (Consumer Chain). 10. Include an example of a company that differentiates at a step in the consumption chain. What step of the consumption chain do they differentiate at and how do you do so? Honda – Product Attributes Step. Honda tends to design motorcycles that appeal to customers who want reliable, easy-to-handle transportation vehicles.

Chapter 5 Animated Executive Summary Quiz: 1. Two products with the e...